How tax-loss harvesting works to offset capital gains

Tax-loss harvesting means selling an investment at a loss in a taxable account so the loss can offset capital gains — and, within limits, ordinary income. Net capital losses can generally offset capital gains dollar for dollar. If losses exceed gains, up to $3,000 ($1,500 if married filing separately) can offset ordinary income each year, with the rest carried forward.

Harvesting is most useful near year-end when you already have realised gains, or after a sharp drop when you still want market exposure. The catch for stocks and ETFs is the wash-sale rule: buying the same or a substantially identical security within 30 days can disallow the loss.

Model the winning sale first (buy price, sell price, dates, income, and state). Then think of harvested losses as reducing net gain — similar to entering a prior-year capital-loss carryover if the loss was already realised in an earlier year. Same-year harvests net on Schedule D before tax is computed.

Do not harvest inside an IRA or 401(k) expecting a current-year capital-loss deduction — those accounts follow different rules. Educational only; large harvests interact with NIIT, state tax, and your full return.